My recent post gave rise to a host of questions around the issue of recycling. What does it mean? How do you do it? And what are the implications for venture investors? I attempted to respond in a Tweetstorm, but recycling is a complicated issue that warrants a more thorough discussion.
When Limited Partners (LPs) invest in a venture fund, they agree to pay an annual Management Fee on committed capital, usually on a declining scale over a 10 year period. In total, these fees amount to around 20% of an investors’ commitment, which implies that LPs only get to put 80% of their investment dollars to work because of management fees. This makes most LPs pretty unhappy - and it should. LPs generally expect to have 100% of their investment working for them, and best practice is to invest up to around 120% of committed capital when possible. Enter Continue reading "Recycling: The challenge and the opportunity for a Seed stage VC"
A Little History
IA Ventures began life a little less than seven years ago, just as the world was coming out of the worst economic crisis since the Great Depression. The term “Micro VC” had yet to be coined. “Big Data” was still somewhat mysterious and edgy to those outside Wall Street, Government and Defense. Unicorns were mythical animals that pranced around meadows and were signs of good luck. And there certainly were no discussions of colonizing Mars (!). Upon reflection, 2009 seems almost a generation ago, but I guess that’s what happens when life, fueled by stunning advances in technology, seems to move at warp speed. But with all of these changes, a few basic principles still remain. The greatest venture funds - and firms - in history started small. They started investing very early in a company’s life, owned a lot and continued investing over time. In Continue reading "The TTD Investment and the IA Ventures Model"
2007 was only 8 years ago. Back then, you could see VCs everywhere tapping away on the Blackberry keyboards. If you don’t believe me, I have video evidence of it from Fred Wilson, Bijan Sabet, Roger Ehrenberg, and Howard Lindzon.
If you, like me, have been grinding along on email and phone calls all day and need a back to the future type of laugh, I think this will do it for you.
Brad, Jesse and I are happy to announce that our friend and colleague, John Hadl, is joining IA Ventures as Venture Partner, effective immediately. We have personally gotten to know John over the past four years due to our shared investment in PlaceIQ: IA Ventures led the Seed round and John, on behalf of USVP, led the Series A. John impressed us from the outset with his deep domain experience, tireless work on behalf of the founders and insightful perspectives in Board discussions. Further, his open and transparent style strongly resonated with us as candor and collaboration are two qualities we value highly. From our relationship formed through PlaceIQ our interactions continued to expand. As John has spent time with us it became clear that our networks, experiences and styles, though different, are highly complementary.
In addition to being a strong cultural fit, John has an impressive track record both as an angel investor and as a VC. John was an angel investor in and an advisor to both AdMob (Google) and Quattro Wireless (Apple), as well as an angel in BlueKai (Oracle) and Whisper, among many others. John also served on the Board of JumpTap until its sale to Millennial Media. His investments while at USVP include GoPro (IPO), Quantifind, Swoop and ZEFR. John has a knack for identifying the right founders to execute against a particular mission, and actively supporting them in their quest. His track record and reputation as a true partner to entrepreneurs is tangible evidence of his skill and his value.
We are excited about John’s contributions to the team and all that we can learn from him. Hopefully he extracts the same value and goodness from us. We look forward to welcoming John into the IA Ventures family and are confident he will help us better serve our most important constituency - our founders.
Angel investing is red hot as is the concept of crowdfunding start up investment. Part of this phenomenon has been driven by the emergence of AngelList, the brainchild of Naval Ravikant. What started out as a way for a curated set of angels to invest in startups posting on the AngelList site has expanded to include the notion of Syndicates, investor groups headed by prominent angels who deploy capital pledged by themselves and others in a manner akin to a GP/LP construct. Syndicates have been thought by some to be directly competitive with venture capitalists, initially Micro VCs but then perhaps larger venture firms down the line. While Naval has consistently said that this isn’t his intention, it hasn’t stopped others from speculating about the end game for Syndicates.
A recent article in Fortune Magazine got me thinking about the compare/contrast between professionally-led angel syndicates (such as those on AngelList) and seed stage venture firms such as IA Ventures.
A disruptor shakes up angel investing http://t.co/IKqYMRh5tN The Q is whether this is a bull market phenomenon. When $ dry up, who steps up?— Roger Ehrenberg (@infoarbitrage)November 15, 2014
While we invest in partnership with angels in virtually every seed stage company we work with, we are generally the largest investor and lead the round. We also frequently lead seed-extension rounds to support angel and Friends-and-Family financed companies, which need extra runway to hit key operating metrics and business milestones that will enable them to raise strong Series A rounds. This is the bread-and-butter of how we generally initiate our relationship with founders and their companies. When we invest in a company, we reserve multiples of our initial invested capital for follow on investment. In our experience, these reserve multiples can end up being 3-10x of our initial investment over 3-4 rounds of financing, before the expected cash-on-cash return of the later rounds fail to meet our growth criteria (as we are constantly asking ourselves: “Is the probability-weighted return of this investment greater than or less than investing in a new seed stage company?”).
If there is one thing I’ve learned in my 10+ years as a seed stage investor, it’s that plans seldom unfold as expected. This is why: (a) we seek to finance companies adequately from the outset in order to give them a chance to prove or disprove their early hypotheses; and (b) reserve significant additional funds should they be executing well but need more time to hit key Series A metrics and milestones, or the macroeconomic environment becomes hostile and external fundraising is a poor or non-existent option. Having the resources available to support companies during hard times can be the difference Continue reading "Crowdfunding for start-ups: A durable trend or a bull market phenomenon?"